Testing times for Brazilian market
The recent auction of Brazilian generator Gerasul received a lukewarm response and its sale to Tractebel for the minimum price indicates the loss of investor confidence in the country. So can Tractebel prove the analysts wrong? Siàƒ¢n Green reports.
The successful sale of a controlling stake in Brazil`s Centrais Gerados do Sul do Brasil SA (Gerasul) to Tractebel last month seems to have surprised some analysts. Considering Brazil`s economic troubles, and the resulting withdrawal of several interested parties from the auction, perhaps their surprise is justified.
Only a few months ago, competition for the generator was increasing with companies such as Endesa, Duke Energy, AES and Electricité de France looking to enter bids. The winning bid was expected to be at least Real1.2bn ($1.02bn) as a result.
But the recent economic downturn, triggered initially by the Asian and then the Russian crisis, changed the situation. The result was that Tractebel, as the only bidder in the auction, fetched one of Brazil`s most prized generators for the government`s minimum asking price of Real945.7m.
Gerasul`s total generating capacity is around 4800 MW with a 75:25 hydropower:thermal mix, representing seven per cent of the country`s total generating capacity. The company`s market covers the states of Rio Grande do Sul, Santa Catarina, Parana and Matto Grosso do Sul. Tractebel`s investment has bought it 50.01 per cent of the voting rights.
The sale of Gerasul – the first of the Brazilian electricity generators to be privatized – was therefore seen by many as a test of confidence in Brazil`s economy. The fact that the sale went ahead in spite of the lukewarm interest on the day, seems to indicate that some investor confidence does exist. Doubtless Tractebel is quite pleased with itself – it has probably made a good long-term investment provided that it is prepared to invest in its latest acquisition and weather the economic storm.
Brazil`s uncertain economic outlook was what prompted so many potential bidders to pull out of the auction, and whether Tractebel was justified in going through with the deal will be seen over the next few months.
Brazil`s economy is teetering on the brink of collapse, and no-one seems sure which way it will go. The fear among investors is that Brazil will be forced to default on, or at least reschedule, its debt following the recent hike in interest rates designed to stabilize the currency and stem capital flight. However, Brazil has a sound banking system and is politically stable, and recent rumours that the International Mon- etary Fund (IMF) may put together some sort of support package has rallied investor confidence.
It is also likely that the interest rate hike, which will increase debt repayments, is a short term emergency response to a crisis, and that rates will soon fall. The handling of the situation by the government will determine whether the economy spirals into crisis or manages a controlled slowdown into recession.
Either way, Brazil`s privatization programme, an important source of revenue, will be affected. By the time the privatization of the electricity sector is complete, an estimated $45bn of assets will be under private control; the generators themselves, with a combined capacity of 58 GW, could bring in up to Real13bn.
The start of privatization went well for Brazil, with nine regional electricity distributors sold in the second half of 1997, all for large premiums over the minimum asking price. The average premium for the sale of companies such as Cerj and Light was 71.4 per cent. But at the beginning of 1998, interest in the companies on offer waned, with the auction of Bandeirante cancelled due to lack of interest. Bandeirante was due to to go under the hammer once again last month, not long after Gerasul.
Whatever the outlook for the economy, Tractebel, like other companies involved in the Brazilian market, will be required to make significant investment in Gerasul. State holding company Eletrobràƒ¡s recently estimated that $2.5bn per year will have to be spent over the next ten years on the electricity sector in order to carry out the expansion needed to keep pace with demand.
Currently in Brazil, the fastest rate of economic growth is in the north, where electricity consumption is increasing at an annual rate of 20 per cent. In the more industrialized south, which Gerasul serves, the rate is lower at six per cent. The urgent need for investment in the sector was seen this summer when El Niàƒ±o storms and heat waves caused repeated power cuts in Rio de Janeiro.
Unfortunately for Light, the privatized Rio de Janeiro distributor owned by AES, EdF, Houston Industries Energy and CSN, these blackouts highlighted how little had been invested in its system. Light has received much criticism for this failing. Aneel, the industry regulator, was particularly critical of Light and has now set tight controls on the company – including investment requirements. Light also owns Eletropaulo Metropolitana, Brazil`s largest distributor, and recently announced that it will invest Real750m between 1999 and 2001.
Aneel will be just as tough on other privatized companies in order to whip the country`s electricity system into shape, Tractebel included, and this could affect profits. Never- theless, Gerasul`s output has guaranteed buyers for the next few years through power purchase agreements with regional electricity distributors, giving Tractebel at least some level of income. In addition Tractebel has already shown commitment to investing in the country through the 450 MW Cana Brava hydropower scheme announced earlier this year.
Whatever is in store for Tractebel and other potential buyers for the remaining generators due to be sold next year, the fact remains that Brazil is South America`s largest economy with plenty of room for growth. This can only be good news for those willing to accept the risks in these testing times.
Generators` share of capacity, %